Week Ahead – Risk Events & Opps: Trump in Asia (KRW hedge), Congress tax bills (UST curve), RBA/RBNZ (AUD-NZD), softer Mexico (Mexbol)
Monday, November 6, 2017
Week Ahead – Risk Events & Opportunities: Trump’s Asia tour, Congress tax bills (UST curve), RBA vs. RBNZ (AUD-NZD), Mexico softness (Mexbol), KRW hedge attractive
US – House/Senate tax debates, auctions, valuation concerns may move UST curve: In a data-light week (UMich sentiment seen lower on Fri), Foreign policy and Trump-speak will dominate airtime as his Asia tour begins in Japan (Mon), Korea (Tue-Wed), China (Wed-Thu), Vietnam (Fri-Sat), Philippines (Sun). Tax legislation will also be watched as the House Ways & Means Committee begins its days-long tax bill mark-up (Mon) and Senate counterparts are expected to release their version (Wed). In Fed-speak: NY’s Dudley – who is reported to leave in 1H18 – speaks (Tue), Vice Chair of Supervision Quarles (135am Wed on financial regs) and Yellen accepts an award (330am Wed). Quarterly US Treasury auctions also take place: $24bn 3yr (Wed), $23bn 10yr (Thu), $15bn 30yr.
Trade idea (conditional) – Tactical short 10yr US Treasuries at 2.30% yield (from Thu): … If signs of progress emerge in House GOP mark-up and if the Senate version (Wed) is surprisingly similar. Note that the House bill has opted to remove the controversial SALT deductions, which bodes well for resolving differences with fiscal hawks (lobbyists will be on over-drive). UST curve flatness is attracting renewed bearishness and cautiousness around further declines in long-end UST yields. Risks to higher UST yields include (geo)politics, including any DPRK provocations (tail risk), an expanding Mueller probe (ex-NSA Flynn reportedly to be charged soon) and recently released Paradise Papers (implicating Commerce Sec Ross’ Russia ties). We hedge against these risks to our UST view via short KRW and long VIX.
Ref: US fiscal: “Softness” on SALT tax deductions raises questions re GOP “intestinal fortitude” -TN Sen. Bob Corker (3 Oct)
Tax timeline: House GOP Ryan wants passage by Thanksgiving. Senate, parallel process. Reconciliation + final bill by year-end (3 Nov)
Tax plan winners = HFs, big corp, super rich. Losers = homebuilders, high SALT states, working poor -WaPo (3 Nov)
Mueller probe: Special Counsel has enough evidence to charge ex-NSA Michael Flynn and son - NBC citing people familiar (6 Nov)
Trade idea – Strategic long VIX: UST curve flatness is attracting renewed cautiousness around risk sentiment.
Ref: BlackRock's Rieder says UST "crazy priced wrong" expensive. Gross says 10-2yr if 20-30bp flatter would signal impending economic slowdown (6 Nov)
Visual: UST curve spreads
DM Europe – German data, ECB-speak and forecasts could drive EUR; more UK noise and Scandinavian data points: Consensus sees weaker data from Germany this week – factory orders (Mon), IP (Tue) – which may contrast with probably resilient 2018 forecasts by the German govt’s council of independent economic advisers (Wed). ECB publishes its economic bulletin (5pm Thu) and economic projections (6pm Thu). Elsewhere, retail sales are expected to rebound (Tue) and Draghi speaks twice (Tue 5pm/Sat 6pm), Praet (Mon 4pm), Mersch (Tue 2am), ECB Forum w/ Lautenschlaeger/Nouy (4pm), Nouy (Thu 4pm), Constancio (Thu 945pm), Lautenschlaeger (Fri 220am), Mersch (Fri 830pm). In the UK, the post-BOE focus turns to Brexit negotiations (Davis-Barnier on Thu), domestic politics (CBI/Corbyn on Mon, May on sexual harassment Tue am) and economic vital signs that reinforce/refute BOE growth concerns (Halifax house px on Tue seen lower, IP/manufacturing on Fri seen higher/lower, respectively, trade deficit on Fri seen smaller). In Scandinavia, we monitor reaction to upcoming data: IP (Mon 430pm, seen stronger), Riksbank minutes (Thu), Norway CPI (3pm Fri, seen lower). Swiss SNB’s Jordan speaks (Fri 1230am).
Trade idea – Strategic short NOK and SEK-EUR: NOK and SEK have underperformed EUR since the ECB’s ’30 for 9+’ planned shrinking of the QE program. Buy EUR-SEK on any dip post Swedish IP (Mon 430pm) and EUR-NOK ahead of Norwegian CPI (Fri 3pm).
Trade idea – Strategic short EUR-JPY: Weaker German data (Mon, Tue) and Draghi comments (Tue) are likely to reinforce EUR weakness, while the lack of near-term BOJ easing expansion depends more on USD strength for JPY to outperform EUR.
DM Asia-Pac – RBA may ‘out-dove’ RBNZ favouring NZD-AUD, Korea geopol tail risk an attractive hedge: It’s an important week for cenbank commentary with MPCs from RBA (Tue 1130am), RBNZ (4am Thu), RBA monetary policy statement (830am Fri). BOJ minutes will be published (Mon) before Kuroda/his chief economist speak (Mon) and while Trump visits (Sun-Mon). Kuroda speaks again (Wed) with FinMin Aso at an IMF reception and 30-31 Oct summary of opinions are published (750am Thu) at the same time as machine orders (seen slower) followed by the tertiary index (Fri 1230pm, seen weaker). In Korea, risk markets will revolve around Trump’s visit (Tue-Wed), including a speech to the National Assembly (Wed) and potential rhetoric/provocations from Pyongyang.
Trade idea – Strategic short AUD-NZD: OIS markets are currently pricing-in the next RBA and RBNZ hikes in 4Q18 and 3Q18, respectively. If last week’s economic/price trends continue (ref: strong NZ labour, weak Australia CPI), policy divergence may continue and accelerate lower AUD-NZD (led mostly by AUD). CFTC positioning – AUD longs and (now) small NZD short – also supports this strategic trade (target AUD 0.75, NZD 0.70, resp. to 1.07; current 1.108).
Trade idea – Tactical short KRW (vs USD or JPY): Trump’s high-stakes visit to the region (Japan Sun-Mon, Korea Tue, China Wed) raises the risk of harsh rhetoric and/or geopolitical tail risks, which would weaken the KRW from current strong levels (Fri 1114 vs USD and 9.77 vs JPY). This trade also provides a hedge against our strategic JPY shorts and NKY longs.
Visual: AUD-NZD net positioning
EM Asia-Pac – Trump visit and China external data should be constructive for RMB: China external account data will be released: CAB (Mon), FX reserves (Tue), Trade (Wed) – in addition to CPI/PPI (Thu) and money/loans (10-12 Nov). China trade surplus is expected to rebound (good for RMB) according to Bloomberg’s survey of economists. Consensus expects Indonesian GDP (Mon) to rise slightly (5.15% yoy from 5.0%), but this may not be enough for BI to hit 5.8% in 2H17 to meet its 2017 target (5-5.4%). A shortfall could raise Jokowi govt pressure for BI to ease further despite some risks to IDR stability; macropru-easing of credit conditions would be a more prudent approach. In regional central banks, Thailand BOT (Wed), Malaysia BNM (Thu), Philippines BSP (Thu) meet.
Trade idea – Tactical short SGD-CNH (range-trade: entry 4.865, exit 4.86-4.855): Trump’s visit should bias the policy-driven RMB stable-to-stronger vs the CFETS basket (NEER-based SGD is our proxy for the trade-weighted index).
Trade idea – Strategic short China equities: We change our strategic view on China from modest positive to modest negative on more news about the govt’s intent to continue/likely intensify its deleveraging campaign. We are agnostic between selling H-share and A-shares, but may prefer to short small caps to large caps (given sensitivity to funding costs). We stay bearish China local bonds.
Ref: China deleveraging: Financial system is more vulnerable due to high leverage. Some risks are "hidden, complex, sudden, contagious, hazardous" - PBOC Zhou (5 Nov)
PBOC Zhou warning of Minsky moment should not be ignored. Like yelling fire in theatre – FT (20 Oct)
Watchlist: Long Philippines Pcomp (BSP MPC Thu) vs short Thailand SET (BOT MPC Wed), Long Indonesia equities (GDP Mon).
EM EMEA – Soft Hungary/Russia CPI talks down HUF/RUB, Poland/Czech more circumspect: Poland NBP is expected to stand pat (Wed). Czech CPI (Thu) is expected to be unchanged.
Trade idea – Add to strategic long EUR-HUF: Hungarian forinth may see another leg-lower vs the euro ahead of NBH-speak (Mon 9pm) and minutes (Wed 9pm). A weak CPI print (Thu) would encourage more easing.
Trade idea – Strategic short RUB, short Micex: Disinflation (to be reinforced by CPI on Tue) gives govt room to weaken Ruble to gain more mileage on export proceeds – made more crucial if OPEC/Nopec output cuts (on 30 Nov Vienna meeting) are not extended. Note that Russia Energy Minister Novak recently said an extension is ‘not necessarily a given’. Mueller investigation may weigh further on portfolio flows.
Watchlist: Add to strategic short Polish zloty (on dovish NBP MPC on Wed)
EM Americas – Weaker Mexican data reinforces Banxico quandary, Brazil CPI hits trough, Argentina risk-reward flips less favourable: Weakness in Mexican consumer confidence (Mon), investment (Tue) and IP (Fri) would support further Mexbol underperformance. Mexico CPI (Thu) is seen unchanged, which will keep Banxico (Fri 3am) on a hawkish bias – playing down prospects of a near-term rate cut. Brazil CPI (7pm Fri) is expected to rise, which would further limit BCB easing (now seen at 50bp more to 7.00%). Elsewhere Peru BCRP meets (7am Fri) and Colombia BanRep minutes (Fri).
Trade idea – Strategic short Mexbol: Growth is weak (consumer confid Mon, investment Tue, IP Fri), inflation is sticky (CPI Thu) and MXN dynamics are poor (given Nafta and pre-election political fragmentation), which puts Banxico in an undesirable position to maintain a hawkish bias (MPC 3am Fri). Hawkish stance is likely to be reiterated by Banxico Gov. Carstens (Mon), though he is on his way out of office by end of this month.
Trade idea – Reduce strategic long Argentina Merval: Macri election victory gives the govt flexibility to enact orthodox measures to improve competitiveness and/or macro-stability (eg another ARS deval, further rate hikes, subsidy cuts). Such measures could result in a short-term negative shock for equity markets. BCRA MPC and Sturzenegger comments (Tue) will offer clues to medium-term plans (more tightening/rectitude expected?). Extrnal account inflows after a $3.2bn euro bond issue last week provides a good exit opportunity. Re-enter again once value emerges after a potential ARS or Merval sell-off.
Visual: LatAm equity indices year-to-date performance (Mexico Mexbol and Argentina Merval highlighted)
Commodities – Saudi crackdown, OPEC/EIA outlooks, China PPI/metals demand: Oil traders will digest weekend news over the Saudi crackdown as we get closer to the Vienna meeting on 30 Nov where an output cut extension is not a foregone conclusion (on some reluctance from Russia). OPEC World Oil Outlook and US EIA short-term energy outlook (both Tue) may offer opinions on global/US supply-demand oil balance. China energy/commodity trade data (Wed) may point to clues about industrial metals demand (albeit backward-looking) before an expected reduction in demand going into winter (part seasonal, part excess capacity-driven). Likely slower PPI (Thu) could reinforce limited (statistical) scope for further year-on-year increases. Iron ore prices for instance increased just 4.6% yoy in Oct, vs 23.9% in Sep.
Watchlist: Short Brent-WTI spreads (narrower, led by lower Brent), strategic short Copper (?)
Ref: Saudi anti-corruption crackdown: King Salman ordered arrest of Prince Alwaleed, 10 senior members of royal family, 4 cabinet ministers, dozens of ex-ministers incl. head of National Guard (6 Nov)